Banks sell bonds at fastest pace in five years as inflation rises

Lenders sold Rs 28,830 crore of debt last quarter.

The banks are cutting bond holdings at the fastest pace in five years, deterred by accelerating inflation and the widest swings in debt prices in six months.

Lenders sold Rs 28,830 crore ($6.4 billion) of debt last quarter, the most since the three months ended December 31, 2005, central bank statistics show. The 30-day historical volatility of benchmark notes rose to 10.2 per cent on January 10, the highest level since July.

The government’s 10-year bonds yield 8.14 per cent, the most among Asia’s 10-biggest economies after Indonesia, ahead of a report on Friday that will probably show inflation quickened for the first time in three months in December. The Reserve Bank of India will review its assessment that price gains will slow to 5.5 per cent by March when policy makers meet to review rates on January 25, Deputy Governor Shyamala Gopinath said last week.

“Bond yields are bound to rise further,” Anubhuti Sahay, a Mumbai-based economist at Standard Chartered Plc, said in an interview on January 12. “With inflation expected to be well above the central bank’s comfort level, we expect further interest- rate increases by March.” The British bank, the first foreign company to sell shares in India, predicts the yield on benchmark bonds may climb to 8.50 per cent by March. Indian banks disclose the details of their Treasury operations when releasing earnings.(Click for graph)

Wholesale prices
The yield on the 7.8 per cent bonds due May 2020 has climbed 23 basis points since the end of last year in the run-up to the Reserve Bank’s policy meeting. The rate touched 8.26 per cent, this year’s high, as banks’ bond holdings have dropped by Rs 58,400 crore from a high of Rs 14.97 lakh crore in the two weeks ended October 22. The yield on the notes dropped three basis points to 8.14 per cent yesterday on signs the availability of cash at banks improved.

Benchmark wholesale prices rose 8.4 per cent last month from a year earlier, after having increased 7.48 per cent in November, according to the median forecast of 30 economists in a Bloomberg survey before data due on Friday. Food prices rose 16.91 per cent in the week ended January 1, near the previous week’s 18.32 per cent that was the fastest pace of increase since July, commerce ministry data showed yesterday. Food accounts for about 14 per cent of inflation.

The surge in prices may force the central bank to raise the repurchase rate by 50 basis points when it meets for the first time this year, according to Robert Prior-Wandesforde, the Singapore-based head of India and South Asia economics at Credit Suisse Group AG. The Reserve Bank boosted the rate, at which it lends to banks, by 150 basis points to 6.25 per cent last year.

Cash availability
Lenders borrowed Rs 70,300 crore ($15.6 billion) on average a day from the central bank this month, according to data compiled by Bloomberg. They tapped Rs 1.2 lakh crore a day in December, as the sale of third-generation mobile-phone licenses in May and Internet permits a month later drained more than $1 trillion from the financial system. “I continue to be bearish on bonds because we will see a rate hike this month,” Killol Pandya, who manages the equivalent of $111 million in debt funds at Shinsei Asset Management Pvt in Mumbai, said in an interview on Thursday. “Also, liquidity in the banking system is still above the central bank’s comfort zone.”

Debt returns
The difference in yields between the security and US Treasuries due in a decade has widened to 479 basis points from a six-month low of 442 on December 28. India’s three-year government bond yield of 7.78 per cent compares with 12.6 per cent in Brazil, 3.29 per cent in China and 7.02 per cent in Russia.

India’s bonds lost 0.4 per cent this month, Asia’s third worst performance after Indonesia and South Korea, according to indexes compiled by London-based HSBC Holdings Plc. Rupiah notes declined 2.65 per cent while Korean bonds slumped 0.6 per cent. The rupee has weakened 1.2 per cent so far this year, Asia’s third-worst performance, data compiled by Bloomberg show. The cost of protecting the debt of government-owned State Bank, which some investors perceive as a proxy for the nation, has climbed 18 basis points this month to 178 basis points, according to CMA prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The central bank needs to consider the borrowing plan for the financial year starting April, according to Gaurav Kapur, senior economist at Royal Bank of Scotland NV, which is a primary dealer for India’s debt. The government plans to borrow Rs 4.47 lakh crore this fiscal year, after raising a record Rs 4.51 lakh crore in the previous 12 months.

“The government’s borrowing program next year won’t be significantly lower than this year,” Mumbai-based Kapur said in an interview on January 12. “The debt supply is a big problem.” He forecasts the policy rate will go up by at least 75 basis points in 2011.